How To Refinance FHA To Conventional Loan

Homeowners who refinance from a Federal Housing Administration (FHA) loan to a conventional home loan may reap financial benefits, like lowering their monthly payments and saving money.

But what’s the difference between the two loans, and is a refinance from an FHA loan to a conventional one the best option for you?

Can You Refinance An FHA Loan To A Conventional Loan?

Yes, homeowners with an FHA loan can refinance to a conventional one. In fact, refinancing from an FHA loan to a conventional loan may allow borrowers to shorten their loan term, take advantage of lower interest rates and enjoy lower monthly payments.

Why Should You Refinance From An FHA To A Conventional Loan?

The differences between FHA and conventional loans often make the FHA loan a better option for borrowers purchasing their first homes. FHA loans are backed by the government and may have more relaxed requirements (like lower credit score prerequisites) because they’re insured by the FHA.

However, many homeowners opt to refinance FHA to conventional once they have the loan. They may be able to get rid of their mortgage insurance premium (MIP) and lower their monthly payment or tap into their home equity to fund other expenses. If the markets have changed, you might qualify for a lower rate on your mortgage loan when you switch, too.

How To Refinance Your FHA Loan To A Conventional Mortgage

Looking to refinance an FHA loan? The exact process can vary depending on the terms of your current loan and your mortgage lender.

Step 1. Research Rates And Prepare Documentation

Before you switch from an FHA loan to a conventional one, you'll need to do some research. Look at different lenders and compare their rates. Ask about their fees for refinancing.

You may also want to research different types of refinancing. A cash-out refinance, for example, will allow you to borrow from your equity by taking out more than what you owe on your current mortgage in cash. A rate-and-term refinance is focused more on adjusting your interest rate or loan term (or both) without borrowing additional funds.

Whatever the case may be, take the time to gather up important papers, like your pay stubs, tax forms and bank statements, to show the loan officer that you've been responsible with your existing loan.

Step 2. Meet Refinancing Requirements

Before you start thinking about refinancing from an FHA to a conventional mortgage, it's important to know what your lender might require.

It can vary depending on the lender and your personal situation, but in general, here’s what you need in order to refinance to a conventional mortgage based on Rocket Mortgage^® requirements:

• 620 minimum credit score
• 50% maximum debt-to-income ratio (DTI)
• Proof of income
• Homeowners insurance verification
• Appraisal of the home or the equivalent of one to determine home value

Step 3. Submit An Application And Go Through Underwriting

Once you've met the basic eligibility qualifications and submitted the necessary documentation, the next step is to go through the underwriting process. In the underwriting process, the loan officer will complete a thorough evaluation of your financial status and the property being refinanced.

In addition to the personal requirements (credit score, proof of income, etc.) listed above, a home appraisal is necessary to make sure your home’s value aligns with your refinancing goals. Your loan officer will likely also complete a title review to check for any issues that might delay the process.

You may also receive a Closing Disclosure, which outlines the final terms and costs of the mortgage refinance. This includes the loan amount, interest rate, closing costs and any other expenses.

Step 4. Finish The Closing Process

Last but not least, you'll complete the refi closing, just as you did when you took out your original mortgage loan. You will need to review and sign various loan documents and other pertinent paperwork related specifically to the new conventional loan.

Pros Of Refinancing From An FHA To Conventional Loan

Refinancing from an FHA to a conventional loan has its financial benefits. Here’s how it can help you save.

Canceled Mortgage Insurance Premium (MIP)

When you get an FHA loan, you must pay an FHA MIP no matter how much money you put down.

There are two payments: an upfront MIP that you pay at closing and an annual payment that’s broken down and added to your monthly mortgage payment.

If your home loan was finalized on or after June 3, 2013, how long you pay the MIP will depend on the amount you put down.

• If your down payment was at least 10%, you’ll pay the MIP for 11 years.
• If your down payment was less than 10%, you’ll pay the MIP for the life of the loan.

Mortgage Insurance Premium Vs. Private Mortgage Insurance

With a conventional loan, you must also pay monthly mortgage insurance payments if your down payment is less than 20%. This is called private mortgage insurance (PMI).

But unlike with an FHA loan finalized on or after June 3, 2013, borrowers with a conventional mortgage can get rid of PMI when they have enough equity in the home. You can request that your servicer remove PMI once you have at least 20% equity based on the original payment schedule, or you can wait for it to automatically cancel once you meet the servicer’s equity requirement. That's typically around 22%.

If you have an FHA loan, you’ll likely need to pay MIP for 11 years – or until your loan term ends – regardless of your equity. But if you refinance FHA to conventional, you could potentially get rid of your MIP.

Lower Interest Rates

When you refinance your home loan, you get a new interest rate. While conventional loan interest rates are typically a bit higher than FHA rates, you could still get a lower interest rate and save money if current refinance rates are lower than when you first took out the loan. A lower interest rate could potentially save you thousands of dollars.